TTU Limited is considering an expansion plan of its running business. Company wants to choose between a debt offer and an equity offer for its expansion plans. The current plan is as follows: Particulars Amount (in crore

TTU Limited is considering an expansion plan of its running business. Company wants to choose between a debt offer and an equity offer for its expansion plans. The current plan is as follows: Particulars Amount (in crores) Equity Share Capital (₹10 per share) 30 11% Debt 18 Reserve and Surplus 42 Total Capitalisation 90 Total Sales 260 Less: Total Cost 224 EBIT 36 Less: Interest @11% 1.98 EBT 34.02 Less: Tax @ 34.944% (Tax @ 30% + 12% Surcharge + 4% Cess) 11.89 EAT 22.13 The expansion plan is estimated to cost ₹50 crores. If the expansion plan is financed through equity, new shares can be sold at the premium of ₹10 per share and the price-earnings ratio will be 6 times. If this is financed through debt, the new rate of debt will be 12% and the price-earnings ratio will be 10 times. The expansion plan will generate extra sales of ₹130 crores with a return of 11% on sales before interest and taxes. If the company is to follow a policy of maximizing the market value of shares, which form of financing should be chosen ?